States sue tobacco firms and invest in them

States are suing tobacco companies and passing laws to stamp out butts, but when it comes to making money, many consider the weed a dependable friend.

State pension systems keep billions of dollars in tobacco stocks, and overseers are reluctant to dump what has been a cash cow.

"So long as tobacco companies make money, we'll make money off them," said Dee Williams, public pension system director in Utah, which has one of the nation's lowest smoking rates. At the same time, other states are swearing off tobacco stocks. Maryland's retirement agency last year divested after joining 21 other states in a suit against major tobacco companies to recoup health care costs associated with smoking. New Hampshire, too, has sold its tobacco holdings, after its pension manager branded them a bad investment. Oklahoma's pension system has but $19 million invested in tobacco companies. South Carolina lies deep in tobacco country, but its longstanding policy bans pension investments in any stocks. A pending constitutional amendment could lift that prohibition, however. West Virginia is also barred from dabbling in stocks, and Indiana hasn't bought any since it got the go-ahead to invest pension funds last year. But other states, including many that are suing tobacco companies, remain heavily invested in companies that make cigarettes. Michigan keeps $353 million invested in five companies that market tobacco products despite Gov. John Engler's push to sell them off. Their value has nearly tripled since the stocks were purchased. The investment board in Minnesota, another litigant, has $281 million tied up in tobacco-related stocks, despite challenges by Gov. Arne Carlson to justify it. "Why do we want to invest in a ship that's sinking?" Carlson demanded. "You have to do it," said David Bronner, director of the pension system in Alabama, which has almost $100 million in tobacco stocks. "It's the same thing as making investments in the gambling industry." James Tierney, a former Maine attorney general who is coordinating the 22 states' cases, believes the tobacco investments themselves are a gamble. "If we win one suit," Tierney said, "the whole industry will become a very bad investment." Health groups say more is at stake than money. "The governor and legislators feign this self-righteous indignation over smoking, then the state gives the tobacco companies millions of dollars to play with," said Rick Steiner, who heads a citizens group pressing Alaska's Permanent Fund to sell $150 million in Philip Morris Inc. shares. Philip Morris spokesman Nicholas Rolli declined to comment specifically on pension investments but said the company had been a solid performer for investors. Philip Morris delivered a 31 percent return last year, including stock appreciation and re-investment of dividends, he said. Figures from the states put the total in tobacco stocks held by pension systems at $6 billion to $7 billion. Most states say tobacco investments make up 1 percent or less of their total portfolios. The collective portfolio of all of the states' pension systems was about $1 trillion as of the third quarter of 1996, said Paul Zorn, manager of the Government Finance Officers Association in Washington. California has the largest sum socked away in tobacco: $1.2 billion in separate teachers' and public employees' pension systems. A bill that would have required the public funds to divest died last year. The board of the California Public Employees Pension Fund, or CalPERS, "is guided solely by obtaining the highest return for the fund, and social and political decisions really are not to influence our investment policies or decisions," said spokesman Brad Pacheco. New York's public employee pension fund has $583 million in tobacco stocks. While the stocks have performed well, advisers say current valuations are discounted for litigation risks, which make them more volatile. "As a long-term investor, I believe it is appropriate now to limit the fund's exposure to that volatility," New York Comptroller H. Carl McCall said. Texas, whose teachers' retirement fund has $477 million in tobacco holdings, and Maine, whose pension fund has a relatively meager $10 million tied up in tobacco, say constitutional restrictions keep them from flicking away stocks that, to some, are socially questionable. Nevertheless, Maine is currently considering raising cigarette taxes by as much as $1 a pack; Texas is among the 22 states suing tobacco companies. Rhode Island's pension fund holds $32 million in tobacco stocks months after passing laws cracking down on sales to minors.Florida, with about $750 million in tobacco stocks, is weighing a bill to raise cigarette taxes by a dime a pack. Dropping tobacco stocks is not as easy as it may seem, said Don Schaefer of the Public Employees Retirement Association in Colorado, which has $174 million in four companies that handle tobacco products. About 80 percent of the $20 billion retirement fund is in index funds, which mirror the Standard & Poor's 500 index. To be in the S&P 500 index, Schaefer explained, investors must have stock in all 500 companies -- including those that sell tobacco products. Schaefer also said that Philip Morris has diversified holdings in coffee, meat, cereal, beer and other companies, so not all of the investment is really in tobacco.

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